Pandora Media’s (NYSE:P) growth has been stellar when it comes to revenues and number of subscribers. However, given that the company has been growing much faster on its mobile platform where currently monetization is low, it needs to address this issue. Comparing Pandora’s monetization with that of traditional radio, we come to a couple of key conclusions.
First, the desktop segment monetization is at sustainable levels, approaching levels close to that of traditional radio and thus implying Pandora’s ability to monetize effectively with ads on its desktop service. Second, the monetization for mobile is currently significantly lower than that of traditional radio or Pandora’s desktop segment but has been growing at a brisk pace. Though the market remains skeptical, if Pandora can maintain that growth, it can no doubt create a sustainable business on its mobile platform. In such a scenario, our price estimate for the company may turn out to be too conservative.
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Monetization – Pandora Desktop Vs. Pandora Mobile Vs. Traditional Radio
Traditional broadcast radio monetization currently stands at approximately $73 per 1,000 listener hours.  In comparison, Pandora’s desktop monetization stood at $63.1 per 1,000 listener hours in its fiscal year 2012.  Pandora’s monetization on its mobile platform stood at around $20 per 1,000 listener hours for the same period.  This brings down its overall monetization close to $35 per 1,000 listener hours.
Clearly there is a gap between current monetization levels of mobile and desktop and the mobile platform is far off from levels required to build a sustainable business and offset rising content costs. However, the mobile platform continues to grow rapidly. The mobile monetization rate increased last year by more than 50%. Pandora expects to increase its mobile monetization someday to levels similar to what desktops have today.
Path To Higher Monetization
(1) Higher sell through of mobile inventory
Mobile listener hours have grown tremendously over the past few years leading to an increase in mobile inventory. Close to 70% of the total listener hours now come from the mobile platform for Pandora. However, the company currently does not have a large enough sales force in many regional radio ad markets to sell the inventory and establishing this sales force presence will be key to higher sell through rates for the ad inventory. Over time as mobile listener hours growth slows, Pandora should continue pushing the sales of its mobile ad inventory and eventually the mobile monetization levels should catch up with current desktop levels.
Radio ad buyers are for the most part indifferent between placing their ads on the mobile or desktop platform, since traditional radio has forever been a mobile platform. Therefore, the company is confident about its ability to improve mobile monetization to sustainable levels in the future.
(2) Long term potential for increase in ad frequency
Pandora currently serves about 8 to 12 ads per hour which can consist of 7- to 8 interaction-based display ads and 3 to 4 audio ads. In comparison, traditional radio serves around 13 minutes of advertising each hour or about 25 ad spots with each ~30 seconds in duration . Given that Pandora is monetizing its 8-12 hourly ads on the desktop at a rate of $63.1 per 1,000 listener hours, it implies that Pandora is monetizing better than traditional radio on per ad basis.
What this also means is that Pandora has significant opportunity to increase its hourly ad frequency. We believe that this has the most potential in in-vehicle platforms where users are accustomed to a higher ad frequency. The traditional radio market is ~$15+ billion. . The in-vehicle market accounts for about 47% of the traditional radio market and thus presents a big, untapped opportunity for Pandora.
Our price estimate for Pandora can be significantly higher if the monetization improvement strategies are successful. You can gauge this impact by modifying the above forecast. We currently forecast overall monetization for Pandora instead of separate forecasts for mobile and desktop.
Our price estimate for Pandora stands at $7.90, implying a discount of little under 30% to the market price.Notes: